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Budget surplus: going, going ...

Published Sep. 26, 2005

The Congressional Budget Office's new projections have whetted the appetite of many a lawmaker who feels starved after a decade of fiscal dieting. According to the budget office's estimates, the surplus could be as large as $1.9-trillion over the next decade.

With such a large surplus, politicians may be unable to resist the urge to splurge. Tax cuts, prescription drugs for the elderly, beefed-up defense, help for the medically uninsured and expanded aid for education suddenly may all seem affordable.

And many will be comforted by the fact that we can pay down the national debt with the additional $2.3-trillion surplus that the Social Security system will generate in the next decade.

But before expectations run amok, some realistic accounting is in order. As the budget office is careful to point out, the $1.9-trillion surplus will materialize only if Congress adheres to the spending caps enacted in 1997 or freezes discretionary spending for 10 years, a policy many Republicans have endorsed.

Let's be clear. The polar ice caps will melt and flood New York before Congress accepts either of these starvation diets. To stay within the spending caps, Congress would have to cut discretionary spending _ programs such as defense, Head Start and the FBI _ by about 11 percent.

Not that tough? Well, both the president and the Republicans want to boost military spending. Even if defense spending rose no faster than inflation, other discretionary items would have to be cut by close to one-fourth to stay under the caps. If overall discretionary spending was frozen, allowing the military budget keep pace with inflation would mean other discretionary programs would have to be reduced by an unrealistic 40 percent by 2010.

So let's do some realistic budget forecasting. If Congress allows discretionary spending to keep pace with inflation, the surplus over the next decade will shrink from $1.9-trillion to $838-billion, according to the Congressional Budget Office.

Even that pace of growth may prove to be unrealistically low. During its decade-long jihad to balance the budget, Congress let non-defense discretionary spending grow by 20 percent. If Congress holds the growth of defense spending down to the rate of inflation in the next decade, but lets other discretionary spending grow as rapidly as it did during the 1990s, the surplus shrivels to about $300-billion.

Moreover, there are other, unavoidable budgetary demands that the official projections do not take into account. First, the budget office assumes that Congress will not renew 21 provisions of the tax code that will expire in the next 10 years. If Congress extends these provisions _ as it has routinely done _ revenues will be reduced by $100-billion over the decade, bringing the projected surplus down to $200-billion.

The budget office also assumes that more Americans will be hit by the Alternative Minimum Tax. Enacted in 1969, this tax was intended to ensure that wealthy Americans paid some income taxes, regardless of their use of tax shelters. This provision, however, is not indexed for inflation, meaning that over the next decade, it will snare increasing numbers of middle-income families. Last year, 1.3-million households paid this tax; by 2010, some 17-million households will be struggling with it.

Congress will most likely adjust this tax, costing the federal treasury between $30-billion and $80-billion over the decade. The $1.9-trillion surplus now looks more like a $120-billion to $170-billion surplus.

Finally, Congress will face continued pressures from farmers and Medicare providers who believe they bore the brunt of past budget cuts. In 1999 and 2000, Congress dished out more than $6-billion each year in "emergency" aid to farmers. In 1999, Congress also gave relief to hospitals, nursing homes and other health care providers. Expect more payments _ some $50-billion _ to these groups in the future over the next decade.

So what does all this do to our surplus? Expect it to be somewhere around $100-billion. That's certainly much better than anyone expected a few years ago, but it's a far cry from the numbers being tossed about by lawmakers and presidential candidates.

Let's be happy but realistic. We shouldn't let fantasies about huge surpluses lead lawmakers to spend money that will never materialize.

Robert D. Reischauer, a senior fellow at the Brookings Institution, was the director of the Congressional Budget Office from 1989 to 1995.

New York Times